Petroleum products' prices have been raised to unreasonably high levels. There is public discontentment and even social unrest. Even the coalition partners have opposed the move. The government's response is that it is up to Ogra to set the prices in accordance with the international price movement, and that the government is not responsible. Government's claim is only partly true. We will, in this space, attempt to build a perspective on this issue and seek to examine if there is a scope and space to provide some relief to the general public.
Oil prices of brent crude crossed 121 USD per barrel mark in April 2011 and since then it has been coming down. It dipped to 107 USD in December and today it is around 111 USD per barrel. The fear is that if Iran-US stand-off worsens, the prices may go even higher. It is a mind-boggling job to speculate as to how we would be coping with the crisis, if the oil prices soar to a level as high as 150 USD per barrel, which may not be an impossibility. Government would not have the foreign exchange to pay for oil imports, not to talk of the poor consumers. The government must develop an Emergency Plan, based on fuel rationing and its implementation, if such an emergency arises. But this is not the purpose of this article.
HSD prices, as announced by Ogra, stand at Rs 103.46 while Gasoline's at Rs 92.41 per litre, a raise of Rs 4.64 per litre in HSD and Rs 5.36 in Gasoline prices. The crux of the issue lies in taxation; Petroleum Levy and GST. It may be too much to expect any reduction in GST at this stage, although it would not be a sacred cow, if crude prices cross a 125 USD per barrel mark of danger bell. The government would ideally like to earn a levy of Rs 9-10 per litre, as the trend shows. However, in the recent period, it has been content at a stable PL level of Rs 3.16 per litre. On gasoline, it has charged a PL of Rs 9.0 per litre up from Rs 3.00, and similarly on HSD. As Ogra had rightly pointed out, that prices could become more reasonable and acceptable, if PL increase is withdrawn. The increase would not be required.
When government is already under many political problems and stresses, it is an ill-advised strategy to increase tax when the oil price has also increased. In the interest of price stability, just the opposite is required: lower tax when international prices are high and vice versa. At these kinds of atrocious international prices, any increase in Petroleum Levy is simply not feasible, however attractive it may appear for solving the budgetary problem. Indirect levies and taxation on documented sectors such as petroleum are a surer way of enhancing government revenues, in a largely undocumented economy where many sectors enjoy exemptions and where influential people evade taxes.
Ironically, however, government tried to impose a Petroleum Levy of Rs 10.00 per litre in January 2011. It had to retract its decision in a few days as a consequence of massive unrest and political opposition. It may have to do the same now. Sooner the better; withdraw the increase in Petroleum Levy, bringing the prices to the last month's level.
The longer-term policy issues should also receive the attention of the policy makers; higher taxation and prices on HSD than on Gasoline. Diesel is used in public transport. Since the present government took over, it changed the long time policy of maintaining lower prices of HSD as compared to the Gasoline that goes into the private transport. Throughout the world, Diesel taxation and prices are kept lower. Because HSD consumption is several times higher than that of Gasoline, the potential to earn revenue from HSD is much higher. Perhaps the latter has been the major reason behind the policy since 2008. It is said that environmental reasons are also a reason as Diesel is comparatively more polluting fuel. What is the consequence? The new policy has fuelled inflation, especially the food prices and public transport fares inflation crippling the back of the poor and the other low income groups. The other consequence is that public transport has massively shifted to CNG, fuelling and aggravating the gas crisis. Careless pursuit of revenue can be counter-productive and even very destructive. The loss in revenue can be even higher through increased taxation than without or lesser taxes, as output and efficiency may suffer in addition to the public unrest that results in loss of production and property.
It is unfortunate that the relevant bureaucracy is not able to advice the government on such sensitive implications in a quantitative and relatively precise manner through some mathematical modes linking fuel prices to inflation and growth. At least one has never heard any discussion about such forecasts except some broad generalisations and statements of the kind that have been mentioned earlier.
An interesting controversy arose as to whether the Minister for Petroleum should or should not have revealed the price in advance. May be it is against the decorum, but too much should not be read into it. International prices and the trend there of is known to every one. Minister knows the Petroleum Levy, as it is decided by the government. All other price calculation is under a fixed formula. Ogra has no discretion in it, except for occasional adjustment of dealers' commissions and other small incidentals. This also answers the question whether the government has any influence on monthly Petroleum price adjustment, and that it is done independently by Ogra. The Ogra calculates price, based on international price movement and government's decision on the level of taxation. I am sure that some kind of deliberation goes on before Ogra makes its announcement letting government know the results and opportunity to make adjustments in taxation, if desired. Thus making an innocent face by the PM that Ogra does it all is at best a political management.
Concluding, the sincere advice to government would be to withdraw the increase in Petroleum Levy and thus the increase in prices without any further loss of time. It should also start developing fuel emergency plans based on fuel rationing as discussed earlier. The policy of making HSD dearer should also be reversed gradually, as the revenue impacts may permit.